Bancherul - BANCI / ENGLISH / S&P: EMEA High-Yield Consumer Goods Companies' Creditworthiness Is On The Slide, Says Report

The weak or vulnerable business risk profiles that prevail among speculative-grade consumer goods credits in Europe, Middle East, and Africa (EMEA) are exposing these credits to a rapid decline in credit quality, says a report titled "Credit Slides As EMEA High-Yield Consumer Goods Firms Grapple Tough Trading Conditions," published today by Standard & Poor’s Ratings Services.

What’s more, the general economic gloom and ongoing dislocation in the credit markets makes it unlikely that this slide will be arrested anytime soon.

"In the past four months, we have taken negative rating actions on eight of the 20 high-yield consumer goods companies we rate in the EMEA region, lowering ratings, revising their outlooks to negative, or placing their long-term corporate credit ratings on CreditWatch with negative implications," said Standard & Poor’s credit analyst Diego Festa. "We believe these vulnerable credits will struggle to find the necessary funding or achieve any relaxation in their credit terms over the next 12 months.

"By contrast, companies that remain operationally stable in the sector--typically in the ’BB’ category--will likely gain a year’s breathing space before fundamental macroeconomic issues such as deteriorating consumer confidence affect their businesses."

Six concerns dominate Standard & Poor’s analysis of the EMEA speculative-grade consumer goods sector. From a business risk perspective, incumbents exhibit narrow product and geographic diversification, are exposed to rising commodity prices, and experience fierce competition in mature markets. Equally, on the financial side these companies are under pressure from increasing working capital requirements, restricted availability of additional working capital, and weak prospects for refinancing and the extension of debt maturities. As a result, even a modest decline in operating performance can have significant financial consequences for credits in the sector.

As the report points out, negative outlooks outnumber positive outlooks among the rated universe of speculative-grade consumer goods manufacturers in the EMEA region. Moreover, negative rating actions have predominated among companies with vulnerable business risk profiles, commencing in the fourth quarter of 2007. Luxury goods manufacturers, due to their relatively small scale, are most exposed because of the softening in consumer spending coupled with the seasonality of their business.